On May 15, we issued an updated research report on Teck Resources Limited TECK. The company is poised to gain from cost-reduction initiatives, strong project pipelines and innovation-driven efficiency program. However, weak commodity markets and a global economy slowdown amid the coronavirus outbreak are concerns.
The company recently reported first-quarter 2020 results. Adjusted earnings per share came in at 13 cents, missing the Zacks Consensus Estimate of 15 cents. The figure also tanked 83% year over year. The COVID-19 pandemic has led to significant reductions in the commodity prices, which hurt the quarterly earnings. Further, the underperformance resulted from the dismal performance of the energy business unit due to significant decline in global benchmark crude oil prices.
Solid Project Pipeline Stokes Growth
Teck Resources is poised to gain from the Neptune Bulk Terminals facility upgrades and construction of the Quebrada Blanca Phase 2 copper project. The Neptune Bulk Terminals project will strengthen the steelmaking coal supply chain and meet the long-term requirements of customers for consistent, high-quality products. Furthermore, expansion of the Elkview Operations plant will boost the overall steelmaking coal production capacity. The Quebrada Blanca Phase 2 copper project will transform the company’s copper business, making it a major global copper producer. Though the company has temporarily suspended construction activities on the QB2 project amid coronavirus fears, there are significant opportunities to increase production and mine life in future phases.
Cost-Reduction Actions to Boost Growth
The company has implemented a cost-reduction program to lower operating costs and deferred some of the planned capital projects in a bid to counter the uncertain economic conditions. It has increased the total targeted cost reductions to $610 million through the end of 2020 compared with the $500 million previously announced. Given the coronavirus pandemic-induced crisis, Teck Resources has further increased total targeted cost reductions to $1 billion for the current year. This will bolster the company’s margin for 2020. Moreover, Teck Resources continues to implement its innovation-driven efficiency program RACE21 that is expected to improve productivity across the business.
Few Headwinds to Counter
Weak Commodity Price Woes
The global economic uncertainty and the pandemic have adversely impacted commodity prices. The extent and duration of the impact that the pandemic might have on demand and commodity prices, suppliers and global financial markets cannot be ascertained at this time. Consequently, the company has suspended its 2020 annual guidance. Further, disruptions at mine sites due to the pandemic will likely hurt mine production growth in the second quarter. The company expects second-quarter sales volume at the Steelmaking Coal segment to decrease due to the unfavorable impact of the coronavirus pandemic on global economic activity, and steelmaking coal demand and supply.
Given the weak demand due to the coronavirus outbreak, and the high inventory levels given the rail and port constraints, the company plans to shut down Neptune Bulk Terminals, in order to progress the facility upgrade, which might mar quarterly coal production.
Further, pricing softened in 2019, reflecting the pressure on steelmakers’ margins factoring lower steel pricing and persistent high iron-ore prices. Steelmakers curbed production amid uncertainties created by trade disputes and the global economy slowdown. The copper and zinc metal markets were under pressure during the March-end quarter, affected by the macroeconomic slowdown. Moreover, sales volumes of refined zinc from the company’s Trail Operations and Red Dog zinc concentrate is expected to decrease significantly in second-quarter 2020 due to the unfavorable impact of COVID-19.
Sluggish Energy Market to Hurt Teck Resources
Teck Resources’ Energy business has bearing the brunt of the volatility in the global crude oil prices. During the first quarter, the company reduced Fort Hills to a single-train facility resulting in lower production of bitumen. Furthermore, bitumen production was affected by the Government of Alberta production curtailments that came into effect on Jan 1, 2019. Assuming ongoing production on the basis of operating Fort Hills as a single-train facility through the balance of 2020, its operator Suncor now expects Fort Hills’ annual production to be approximately 100,000-120,000 barrels per day, of which Teck Resources’ share is 21.3%. The company expects its share of Fort Hills production for 2020 will be reduced to approximately 8-9 million barrels of bitumen.
The company’s stock has depreciated 56.6% over the past year compared with the industry’s decline of 8.5%.
Zacks Rank & Stocks to Consider
Teck Resources currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space are Newmont Corporation NEM, Barrick Gold Corporation GOLD and Franco-Nevada Corporation FNV, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Newmont has an expected earnings growth rate of 90.2% for 2020. The company’s shares have surged 103.6% in the past year.
Barrick Gold has an estimated earnings growth rate of 60.8% for the ongoing year. Its shares have soared 112.7% over the past year.
Franco-Nevada has a projected earnings growth rate of 19.2% for the current year. The company’s shares have appreciated 92.5% in a year’s time.
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